Mens rea and clandestine removal are necessary for Section 11AC penalty; stock discrepancies alone justify only limited penalty.

In the absence of proof of mens rea and any allegation of clandestine removal, the stringent penalty under Section 11AC of the Central Excise Act, 1944 was not attracted merely because of excess raw material and shortage of finished goods. The appellate authority therefore reduced the penalty while sustaining a limited penalty for contravention of Rule 10 of the Central Excise Rules, 2002, and the Tribunal found no infirmity in that approach. The Revenue's request for enhancement of penalty was rejected, and the reduced penalty was sustained.

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Issues: Whether the Revenue was entitled to enhancement of penalty when the appellate authority had reduced the penalty on the ground that mens rea was not established and that, in the absence of any allegation of clandestine removal, Section 11AC could not be invoked.

Analysis: The appellate authority found that although there was excess stock of raw material and shortage of finished goods, there was no allegation or proof that the goods were intended for clandestine removal. On that basis, it held that the essential ingredient of mens rea was not proved, so penalty under Section 11AC of the Central Excise Act, 1944 was not attracted. The authority, however, maintained that there was a contravention of Rule 10 of the Central Excise Rules, 2002 and therefore a limited penalty was still warranted. The Tribunal found no infirmity in this reasoning.

Conclusion: The Revenue's request for enhancement of penalty was rejected and the reduced penalty was sustained.

Final Conclusion: The decision affirms that in the absence of proved mens rea and any allegation of clandestine removal, the stringent penalty provision cannot be invoked merely on account of stock discrepancies, though a lesser penalty for procedural contravention may survive.

Ratio Decidendi: Section 11AC penalty cannot be imposed without proof of mens rea and a link to clandestine removal, where the facts disclose only stock discrepancies and procedural contravention.

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